The Efficient Market Hypothesis states that at any given time, security prices fully reflect all available

information. The implications of the efficient market hypothesis are truly profound. Most individuals that buy and sell securities (stocks in particular), do so under the assumption that the securities they are buying are worth more than the price that they are paying, while securities that they are selling are worth less than the selling price. But if markets are efficient and current prices fully reflect all information, then buying and selling securities in an attempt to outperform the market will effectively be a game of chance rather than skill.

The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of Eugene Fama. Fama persuasively made the argument that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information. If a market is efficient, no information or analysis can be expected to result in outperformance of an appropriate benchmark. "An 'efficient' market is defined as a market where there are large numbers of rational, profitmaximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value."

There are three forms of the efficient market hypothesis

1. The "Weak" form asserts that all past market prices and data are fully reflected in

securities prices. The weak form EMH stipulates that current asset prices already reflect past price and volume information. The information contained in the past sequence of prices of a security is fully reflected in the current market price of that security. It is named weak form because the security prices are the most publicly and easily accessible pieces of information. It implies that no one should be able to outperform the market using something that "everybody else knows". Yet, there are still numbers of financial researchers who are studying the past stock price series and trading volume data in attempt to generate profit. This technique is so called technical analysis that is asserted by EMH as useless for predicting future price changes.
2. The "Semistrong" form asserts that all publicly available information is fully

reflected in securities prices. In other words, fundamental analysis is of no use. The semi strong form EMH states that all publicly available information is similarly already incorporated into asset prices. In another word, all publicly available information is fully reflected in a security's current market price. The public information stated not only past prices but also data reported in a company's financial statements, company's announcement, economic factors and others. It also implies that no one should be able to outperform the market using something that "everybody

else knows". This indicates that a company's financial statements are of no help in forecasting future price movements and securing high investment returns. 3. The "Strong" form asserts that all information is fully reflected in securities prices. In other words, even insider information is of no use. The strong form EMH stipulates that private information or insider information too, is quickly incorporated by market prices and therefore cannot be used to reap abnormal trading profits. Thus, all information, whether public or private, is fully reflected in a security's current market price. That's mean, even the company's management (insider) are not able to make gains from inside information they hold. They are not able to take the advantages to profit from information such as take over decision which has been made ten minutes ago. The rationale behind to support is that the market anticipates in an unbiased manner, future development and therefore information has been incorporated and evaluated into market price in much more objective and informative way than insiders. Securities markets are flooded with thousands of intelligent, well-paid, and well-educated investors seeking under and over-valued securities to buy and sell. The more participants and the faster the dissemination of information, the more efficient a market should be The implications of the EMH for optimal investment strategies The EMH has implied that no one can outperform the market either with security selection or with market timing. Thus, it carries huge negative implications for many investment strategies. Generally, the impact of EMH can be viewed from two different perspectives: i) Investors perspective: Technical analysis uses past patterns of price and the volume of trading as the basis for predicting future prices. The random-walk evidence suggests that prices of securities are affected by news. Favourable news will push up the price and vice versa. It is therefore appropriate to question the value of technical analysis as a means of choosing security investments. Fundamentals analysis involves using market information to determine the intrinsic value of securities in order to identify those securities that are undervalued. However semi strong form market efficiency suggests that fundamentals analysis cannot be used to outperform the market. In an efficient market, equity research and valuation would be a costly task that provided no benefits. The odds of finding an undervalued stock should be random (50/50). Most of the time, the benefits from information collection and equity research would not cover the costs of doing the research. For optimal investment strategies, investors are suggested should follow a passive investment strategy, which makes no attempt to beat the market. Investors should not select securities randomly according to their risk aversion or the tax positions. This dose not means that there is no portfolio management. In an efficient market, it would be superior strategy to have a randomly diversifying across securities, carrying little or no information cost and minimal execution costs in order to optimise the returns. There would be no value added by portfolio managers and investment strategists. An inflexible buy-and-hold policy is not optimal for

matching the investor's desired risk level. In addition, the portfolio manager must choose a portfolio that is geared toward the time horizon and risks profile of the investor. ii)Financial managers perspective : Managers need to keep in mind that markets would under react or over react to information, the company's share price will reflect the information about their announcements (information). The historical share price record can be used as a measure of company performance and management bear responsibility for it. When share are under priced, managers should avoid issuing new shares. This will only worsen the situation. In normal circumstances, market efficiency theory provides useful insight into price behaviour. Generally, it can be concluded that investors should only expect a normal rate of return while company should expect to receive the fair value for the securities they issue.

Empirical Tests for efficient Markets Weak form Serial correlation Run Test Filter test Relative strength method

Semi strong form Market reaction test Announcement effects

Strong form